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The Libor Investigation

Investigators in the U.S., Europe and Asia have been probing alleged wrongdoing in the interest-rate-setting process for about two years. A series of Wall Street Journal articles in 2008raised questions about whether global banks were manipulating the process by low-balling a key interest rate to avoid looking desperate for cash amid the financial crisis.

U.K. Financial Watchdog Plans Scrutiny of Dark Pools, Bank Culture

By Margot Patrick

LONDON—The U.K. Financial Conduct Authority has put dark pools, asset-manager fees and banking culture in its sights for closer study in the coming year, warning that it still sees the risk of manipulation in widely used financial benchmarks.

Other areas of scrutiny laid out in the FCA’s annual business plan on Tuesday include competition in investment banking, and the effects of sweeping U.K. pension reforms on sales and advice for retirement-investment products.

The FCA is about to enter its third year of operation after a shake-up of U.K. regulation after the financial crisis. Last year, its workload rose dramatically as it took over supervision of around 50,000 consumer-credit firms. Now overseeing 73,000 financial firms, the authority’s core budget in the 2016 financial year will rise by 6%, to £479 million ($714 million) from £452 million.

The regulator said it would start a review of dark pools—the electronic trading venues that give users anonymity–in the first quarter of next year “to increase our knowledge of the conflicts of interest that may be inherent.”

Around the same time, it will examine the charges fund investors pay to asset managers, after years of complaints from consumer groups about a lack of transparency around fees.

The FCA said it would also study banks’ and other firms’ efforts to improve their culture after a spate of bad behavior in recent years including attempted market manipulation in interest-rate and foreign-exchange markets.

“It is vital that firms, in wholesale and retail markets, ensure that cultural changes have been made to prevent poor conduct in future,” the FCA said.

An increased focus by regulators on benchmarks such as the London interbank offered rate, which was at the heart of a global market rigging scandal, has “gone some way to mitigating the risk of the type of poor conduct that leads to a lack of trust in the financial sector,” the regulator said. “However, we consider the risk of manipulation still exists.”

The regulator flagged banks’ systems and controls to prevent financial crime as a new area of longer-term focus, because of “the increased potential for financial crime to have a negative impact on our objectives.”

It said it still sees “often poor” anti-money-laundering systems and controls in firms of all sizes.

Former Rabobank Trader Pleads Guilty in Libor Probe

By Maria Armental

A former trader at Dutch lender Rabobank pleaded guilty on Monday in federal court to conspiring to rigging a key lending benchmark that underpins interest rates on trillions of dollars of financial contracts, from corporate debt to home mortgages.

Lee Stewart, 51 years old, who worked as a senior derivatives trader for Rabobank, admitted to conspiring to manipulate the London interbank offered rate, or Libor, between at least May 2006 and early 2011.

By manipulating the rate, which is compiled daily based on estimates from more than a dozen banks on how much it would cost them to borrow from other banks, officials charged the traders were able to reap higher profits.

At least six other Rabobank employees have been charged in connection to the probe, according to court documents.

Mr. Stewart is scheduled to be sentenced on June 9 in U.S. District Court in Manhattan.

The Libor scandal has ensnared more than a dozen financial institutions around the globe and netted more than $5 billion in penalties. In 2013, Rabobank agreed to pay $1.07 billion to settle accusations it had skewed key financial benchmarks, including the Libor.

And a Rabobank trader waived extradition and appeared in US court to face #Libor charges. First time that's happened. http://t.co/2sFGzGEQ63

2 important developments in #Libor case last night. US defendant loses bid to dismiss charges. http://t.co/H2R65IgwQY

Rabobank Trader Pleads Not Guilty to Libor-Fixing Charges

By Lisa Beilfuss

The former global head of liquidity and finance for Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A., or Rabobank, waived extradition and appeared in U.S. federal court Friday for an arraignment on charges related to his alleged role in an interest-rate-manipulation scheme.

Anthony Allen, of Hertforshire, England, pleaded not guilty. The court released Mr. Allen on a $500,000 bond and set a trial date for Oct. 5.

A representative from Dutch lender Rabobank couldn’t immediately be reached for comment.

Mr. Allen was indicted in October and is one of six Rabobank traders charged by the Justice Department for involvement in a London interbank offered rate-fixing scandal. The Rabobank investigation is part of a long-running broader probe into allegations of widespread attempts to manipulate the Libor and other widely used interest-rate benchmarks.

Mr. Allen is the first defendant charged by the DOJ in the Libor case to waive extradition.

The Libor serves as the primary global benchmark for short-term interest rates and affects trillions of dollars of corporate debt, home loans and other financial contracts.

The British Bankers’ Association calculates the Libor rate based on submissions from banks around the world, including Rabobank, and publishes the rate daily.

According to the DOJ, Mr. Allen put in place a system in which Rabobank employees who traded in derivative products linked to U.S. dollar and Japanese yen Libor rates regularly communicated their trading positions to Rabobank’s Libor submitters, and then asked others at Rabobank to submit Libor contributions consistent with the traders’ or the bank’s financial interests, to benefit the traders’ or the banks’ trading positions.

The scandal, first brought to light in 2012, ensnared at least 18 financial institutions spanning 11 countries and has resulted in billions in penalties. Rabobank was fined $1 billion last October for its role.

Last June, in an effort to prevent future manipulation, the BBA said publication of banks’ submissions would be embargoed for three months.

Why Financial Benchmarks Give Investors a Boost

By Chiara Albanese

Not all financial benchmarks come with a large reputational stain.

While the trust in Libor and foreign exchange benchmarks has been undermined by a series of regulatory probes into their possible manipulation, indexes produced by independent administrators have “revolutionized” the investment world and have been “source of financial market innovation” according to the findings of a new report to be published tomorrow by the Cass Business School.

In an 18-page brief on financial market indexes, Cass professors Andrew Clare and Steve Thomas found that indexes have been a confidence booster for markets.

The study draws attention to the need for the market to draw a line between benchmarks constructed by surveying market participants, such as Libor, and those built out of actual transactions from regulated entities which are used to price index tracking mutual funds and exchange traded funds.

“Although the process for calculating Libor was transparent, the benchmark fell short in terms of data integrity, independence and indeed governance,” Prof. Clare said.

But that doesn’t seem to have affected the integrity of indexes used to track funds’ performance.

Take, for example, exchange traded funds, which passively replicate the performance of indexes. Their popularity has grown exponentially, with around 4000 exchange traded funds available to investors. At the end of 2014, these funds — which rely heavily on the indexes they track — had around $2.7 trillion of assets.

“The report is a significant vindication of the importance of benchmark providers in ensuring innovative, competitive and stable financial markets,” said Rick Redding, chief executive at the Index Industry Association.

Indeed, the report found that “anything that might reduce the competition between independent benchmark administrators would be at the expense of investor choice.”

There are three main criteria that fund managers consider when picking a specific index.

First, transparency, which defines the way the index is constructed. “The method used to calculate index returns should be clear and unambiguous. This clarity should also extend to the process used for additions to and withdrawals from the index,” the report said.

Second, data integrity, which means investors want to be sure a benchmark administrator uses the most reliable source for data, such as regulated securities or commodities exchanges.

Finally, benchmarks need to be independent in how data from the provider is collated and distributed.

“However,” the report concedes, “some financial market benchmarks do not embody these attributes.”

The Morning Risk Report: China Bank Probes Point to Governance Issues

By Samuel Rubenfeld

China’s high-profile anti-corruption drive has turned its head toward the nation’s financial sector, as multiplereports noted this week, all of which pointed to the questioning of a senior executive of one bank and a board member of another regarding possible corruption. To that end, Beijing’s anti-graft authorities recently formed a department to focus mainly on the financial sector, the Wall Street Journal reported Tuesday, citing Chinese officials familiar with the matter.

Fitch Ratings, in a statement on Tuesday, said the investigations of the two bank leaders shouldn’t greatly affect their employers, but they do “underscore broader issues” of governance, management and political risks at China’s banks. The agency said its ratings for China’s banks “already reflect a degree of risk related to weak corporate governance,” and that a lack of transparency, as well as nascent regulatory and legal systems, are a sector-wide constraint on ratings. ”These events…could be a precursor to a wider investigation into corporate management. If so, as far as the financial sector is concerned, it has the potential to enhance transparency and improve governance standards in the long run–which would be credit positive,” said Fitch.

Joe Murphy, an attorney with 35 years’ experience practicing in the compliance field, said the probes will likely send a message to Chinese firms that they need to have compliance programs, and independent reviews of those programs. Firms that are beholden to local governments, a common arrangement in China, present a high risk for corruption, he said. “You need some independent controls, and independence in the board,” said Mr. Murphy. “That board needs to supervise a compliance program. Any type of corruption investigation is likely going to lead to the implementation of a compliance program.”

Alibaba lawsuit faces long odds. The law firm Robbins Geller Rudman & Dowd LLP has filed a class action suit against Alibaba Group Holding, faulting the company for not disclosing meetings with China’s State Administration of Industry and Commerce prior to its record-setting $25 billion public offering last September. Winning the case faces longer than the usual odds, attorneys say, and could be academic, because Alibaba’s risk disclosures make it clear there are obstacles to enforcing U.S. court judgments against the company.

Flavorings makers focus on safety. Food and flavorings manufacturers are looking for ways to minimize the health and safety risks their workers face when handling large quantities of chemical compounds used to enhance scents and flavors. Federal exposure limits for the vast majority of such chemicals haven’t been updated since the 1970s, and while some private groups have issued recommendations it’s mostly falling on manufacturers to find solutions to keep workers safe and prevent complaints, lawsuits and workers’ compensation claims that could cost them money and tarnish their reputations.

COMPLIANCE

Exit nears for Petrobras CEO. The chief executive of state-run oil company Petroleo Brasileiro SA is on her way out but will stay on at least until the company’s delayed audited third-quarter results are released, likely in a month, people familiar with the matter told the WSJ. Chief Executive Maria das Gracas Foster has for months been under mounting pressure from investors and opposition politicians to resign from her post amid a widespread corruption scandal. That pressure intensified Tuesday when local media outlets reported that Brazilian President Dilma Rousseff had decided to replace Ms. Foster. Investors cheered the reports, sending Petrobras shares up more than 14% in Sao Paulo trading.

BP faces action by CFTC over pipelines. the Commodity Futures Trading Commission is preparing to name BP and other companies in an enforcement action alleging that they broke anti-fraud and reporting rules while using oil pipelines in Canada, the energy group disclosed, the Financial Times reports. Staff from the CFTC have informed BP they intend to recommend legal action after “investigating certain practices relating to crude oil pipeline nominations procedures” in Canada, the company said in quarterly results published on Tuesday.

Cardinal Health sued for alleged fraud. Cardinal Health Inc. said a whistleblower complaint accuses of fraud one of its divisions and other manufacturers and distributors of ostomy and continence-care products, the WSJ reports. The complaint against Cardinal Health at Home–its mail-order, direct-to-consumer provider of disposable medical products for chronic disease patients–was filed in November in U.S. District Court in Massachusetts., the drug wholesaler said. Cardinal Health said in a regulatory filing it is cooperating with the Justice Department in its investigation.

Canada considering whistleblower program. The Ontario Securities Commission said on Tuesday it is looking at launching a whistleblower program that would pay up to C$1.5 million ($1.21 million) to tipsters who help it snare those breaking securities laws, Reuters reports.

Mexico’s president calls for contractor probe. Mexican President Enrique Peña Nieto called Tuesday for the government’s watchdog agency to investigate whether there was any conflict of interest in federal government works awarded to contractors that sold homes to the first lady, the finance minister and to the president himself, the WSJ reports. In public remarks about the real-estate scandals affecting his government, Mr. Peña Nieto reiterated that there was nothing illegal or improper in the purchases made from government contractors. But he acknowledged that revelations have generated doubts about the honesty of his government.

ICAP fined over Libor manipulation. ICAP PLC has been fined 15 million euros ($17.2 million) by the European Union’s antitrust arm for helping traders to manipulate yen Libor derivatives, Bloomberg reports. ICAP spread misleading information to some lenders that supplied information to panels that set the interbank lending rate for yen Libor and aided contacts between traders, the European Commission said in an e-mailed statement.

Caesars hires money laundering expert. Caesars Entertainment, under investigation by the U.S. Treasury and a federal grand jury over alleged failures to comply with anti-money laundering law, has hired away Wal-Mart Stores top expert, Reuters reports. Caesars, whose operations include the Caesars Palace and Flamingo casino hotels on the Las Vegas Strip, hired Benjamin Floyd for a senior vice president position dedicated to anti-money laundering, or AML, compliance, a casino spokesman confirmed. Floyd started his new job last month.

U.K. fines KPMG over conflicts. The U.K. accountancy watchdog said on Tuesday it had fined KPMG a total of £390,000 for putting commercial considerations above ethical standards for auditors in two separate cases of misconduct that stretch back to 2010 and 2011, the Financial Times reports.

India gives small banks a pass on FATCA. The Reserve Bank of India has exempted regional rural banks with assets of less than $175 million from registering with U.S. tax authorities under the Foreign Account Tax Compliance Act, Regulation Asia reports. The country’s central banks also said that rural banks, taken together with related entities, with assets of below $500 million are not required to register with the U.S. Internal Revenue Service, which promotes the anti-tax evasion law known as FATCA.

NY attorney general bars herbal supplements. New York Attorney General Eric Schneiderman has ordered GNC Holdings, Target Corp., Wal-Mart Co., and Walgreens Inc. to stop selling store-brand herbal supplements after tests showed these supplements don’t usually contain the ingredient advertised, the WSJ reports. Mr. Schneiderman has requested the companies provide information about how their supplements—such as ginseng, St. John’s wort, echinacea and garlic—are processed.

Korean bribery evolves. In South Korea, there’s evidence of evolution in the art of bribery, the WSJ reports. Traditionally, those looking for business favors have provided apple boxes full of cash or late-night entertainment. But a recent investigation by the Seoul Central District Prosecutors’ Office found that bribery has become more personalized. A luxury sedan, an imported premium car, a high-end bicycle and even tuition for golf lessons have been part of the kickbacks offered by lobbyists to executives at Korea’s utilities companies, the prosecutor’s office said in a statement this week.

GOVERNANCE

Wintergreen asks Coca-Cola to retract awards. Wintergreen Advisers LLC is asking Coca-Cola Co. to retract “secret bonus” shares given to top management and asked for the company’s board to resign, along with anyone involved in devising or promoting the executive-compensation plan, the WSJ reports. In a letter to the board released Tuesday, Wintergreen said the proxy statement for a revised plan announced in October failed to adequately explain the program. Wintergreen charged that proxy statement fell “far short of the both the spirit and letter of federal securities laws governing proxy disclosure.”

World Bank launches probe over China loan. The World Bank has launched an investigation into whether its chief financial officer and other top brass mishandled a $1 billion Chinese loan to the bank’s poverty fund, people familiar with the matter told the WSJ. The bank’s president, Jim Yong Kim, hired a top law firm on behalf of the institution in late December to conduct the review after senior finance officials flagged the transaction to external auditors, according to these people. At issue is whether management created a conflict of interest when one of the bank’s units helped China lend cash to another of the bank’s arms.

RISK

Toyota must pay damages over crash. A federal jury found that Toyota Motor Corp. must pay nearly $11 million to victims of a fatal 2006 crash after deciding Tuesday that a design flaw in the 1996 Camry was partly to blame for the Minnesota wreck, the WSJ reports. Jurors said the company was 60% to blame for the accident, which left three people dead and two seriously injured. But they also found that Koua Fong Lee, who has long insisted he tried to stop his car before it slammed into another vehicle, was 40% to blame.

But co-Chief Executives Anshu Jain and Jürgen Fitschen said heavy legal expenses and regulatory burdens still loom over the bank and indicated further cost cuts are necessary to regain investors’ favor.

Germany’s largest bank posted an unexpected net profit of €438 million ($494 million) in the quarter ended Dec. 31. The average of analysts’ forecast was for a €289 million loss, according to a poll by The Wall Street Journal. The bank reported a €1.4 billion loss in the fourth quarter a year earlier. Deutsche Bank shares were up 2.7% in afternoon trading in Frankfurt.

“While we are encouraged by many of our full-year and fourth-quarter business results, we are working hard to further manage our cost base…and increase our returns to shareholders,” the co-CEOs said in a statement.

The bank acknowledged that there is potential bad news to come. The lower litigation reserves were largely an issue of timing and legal disputes could squeeze profits in the near future. Management also suggested it may lower its profit targets for this year.

Deutsche Bank is currently finishing a strategic review. The co-CEOs indicated the plan, to be presented this spring, will focus on boosting efficiency and returns. “We need to cut costs,” and trim the bank’s balance sheet, Messrs. Jain and Fitschen said in conference calls with analysts and journalists.

The executives are under pressure to accelerate the bank’s turnaround and improve results because its share price has lagged behind those of international rivals over the past year. The two men declined to comment on whether they might sell or float Deutsche’s Postbank retail subsidiary, which is an option on the table, according to people familiar with the matter.

Performance targets “continue to be challenging,” said finance and strategy chief Stefan Krause. Mr. Krause, who said the bank will update profit forecasts in the near future, pointed out that a levy that feeds Germany’s bank-rescue fund will be “some hundred million [euros] higher” than the €148 million levied in 2014 and be booked predominantly in the first quarter

In the fourth quarter, Deutsche Bank’s revenue rose by 19% to €7.8 billion. The bank’s typically strong fixed-income and currency-trading activities underpinned the growth, with revenue up 13% to €1.1 billion. That is above what many analysts expected and better than U.S. rivals including Citigroup Inc., J.P. Morgan Chase & Co. and Goldman Sachs Group., The U.S. banks’ fixed-income, currency- and commodity-trading revenue declined by 23% on average in the fourth quarter, according to Morgan Stanley.

Mr. Jain’s strategy to keep Deutshce Bank’s fixed-income and currency-trading operations largely intact, in contrast with many European rivals, for now appears to be paying off. “We’ve seen the typical seasonal pick up in this year’s first-quarter [fixed-income] trading compared with last year,” Mr. Jain said. The operations have more room to cut costs and shrink their balance sheet, he said.

The bank’s fourth-quarter results also improved because it set aside just €207 million to cover potential fines from looming litigation, below the €1.11 billion in provisions a year earlier and less than the €900 million Morgan Stanley analysts had expected.

The decrease was due to delayed settlement talks in some important cases, the bank said. “We don’t expect litigation will be lower,” Mr. Krause said. “We aren’t in control of timing in settlements.”

Deutsche Bank is among a group of global lenders under investigation for their alleged role in manipulating the London interbank offered rate, or Libor, and currency fixings, and of violating U.S. sanctions for embargoed countries like Iran. While regulators privately say that Libor investigations are largely completed and could be settled in the first half of this year, investigations into the bank’s alleged involvement in foreign-exchange markets will drag into the second half of the year.

As of now, Deutsche Bank has a total €3.2 billion in reserves to cover potential legal fines.

Deutsche Bank’s retail operations made a €55 million pretax profit, compared with €370 million expected by analysts and €218 million reported in the fourth quarter a year earlier. The decline was due in part to a provision of more than €330 million for potential claims from retail-banking clients following a recent verdict from Germany’s Supreme Court that affects the wider German banking industry. Analysts hadn’t included the hit in their estimates.

Results at Deutsche Bank’s retail unit were also weighed down by high costs for the integration of Postbank. Deutsche aims to reap more than €1 billion in annual synergies once the integration finishes. The bank’s two other main units, asset and wealth management and global transaction banking, recorded better pretax profit on higher revenue and lower costs.

U.K. FCA Fines, Bans Two Former Martin Brokers Senior Executives

By Max Colchester, Jenny Strasburg

A U.K. regulator Thursday fined and banned two former senior executives at broker R.P. Martin Holdings for compliance failings in relation to rate-rigging.

The Financial Conduct Authority fined Martin Brokers’ former chief executive, David Caplin, £210,000 ($317,824) and former compliance officer, Jeremy Kraft, £105,000. Both were banned from holding senior roles in the finance industry. The fines come eight months after the brokerage was fined for allegedly helping a trader rig an interbank lending benchmark.

“The FCA has found that Caplin and Kraft’s failings contributed to a culture at Martins that permitted…manipulation to take place and enabled the misconduct to continue undetected over a prolonged period,” the regulator said. The fine marks the first publicly disclosed penalty issued by the U.K. regulator against individuals in relation to rate-rigging.

In a statement Mr. Caplin said he believed he acted in good faith and that “it is a matter of regret that the problems identified by the FCA occurred.”

Mr. Kraft couldn’t be contacted immediately for comment.

The FCA said between 2005 and 2011 Mr. Caplin failed to put in place proper compliance controls to prevent brokers making or receiving “corrupt inducements.” Mr. Kraft didn’t challenge Mr. Caplin on compliance issues, in particular on the role of compliance staff in monitoring the front office, the FCA said. In May last year, the FCA fined Martins £630,000 for misconduct related to attempted manipulation of the London interbank offered rate.

Three Martins brokers allegedly helped a UBS AG trader to manipulate the Japanese Yen Libor rate. The trader rewarded Martins by placing a series of risk-free trades through the brokers, helping boost commission payments. The eventual FCA fine would have been significantly larger, but the broker was unable to pay. Mr. Caplin left Martin Brokers in 2013.

During the time in question Mr. Caplin was chief executive officer of R.P. Martin Holdings Ltd., owner of interdealer broker R.P. Martin. Mr. Kraft also was an executive of the firm, according to regulatory filings. R.P. Martin suspended Mr. Caplin in 2013 in connection with Libor inquiries.

London-based R.P. Martin Holdings last year was fined $2.3 million by regulators in the U.S. and U.K. over accusations of bribes related to Libor manipulation. R.P. Martin was originally fined more than $2.3 million, but the larger figure was discounted based on the firm’s statements that it couldn’t afford it. The firm said its senior management had cooperated with U.K. and U.S. regulators and accepted the $2.3 million fine.

At the end of 2014, R.P. Martin agreed to sell its primary assets to a rival interdealer broker.

Fed’s Powell Says Rate Rigging Undermines Trust in Banking

By Pedro Nicolaci da Costa

Widespread manipulation of key benchmark interest rates such as the London Interbank Offered Rate, or Libor, threatens public confidence in the financial system, and must be prevented through fines and criminal prosecution, Federal Reserve Gov. Jerome Powell said Tuesday.

Mr. Powell has become the Fed’s point-man in global efforts to find a more credible alternative to Libor and other comparable rates around the world, which were alleged to be rigged on a consistent basis to favor the banks setting those rates.

His remarks at the Brookings Institution in Washington referred primarily to a U.K. policy review that is in charge of addressing the problem of rate-fixing. Mr. Powell said the review “looks to identify further steps that should be taken to restore public confidence in fixed-income, currency and commodities markets in the wake of the depressingly numerous instances of serious misconduct in these markets in recent years.”

“That misconduct has been, and will continue to be, addressed through substantial fines and criminal prosecution of the firms and individuals involved,” Mr. Powell added.

Mr. Powell stressed that activities in these financial markets have widespread effects on the broader economy.

Dealers at major Wall Street firms are alleged to have manipulated interest rates to benefit their trading positions, and banks were accused of reporting artificially low rates in the financial crisis to conceal their problems. Seven banks and brokerages have settled with regulators over alleged manipulation, and some of their employees have been criminally charged.

In November, Citigroup Inc. and J.P. Morgan Chase& Co. agreed to pay more than $1 billion each to resolve allegations that they tried for years to manipulate the foreign-currency market, the biggest fines wrung from a group of six banks by regulators in the U.S., U.K. and Switzerland.

Fed’s Powell says rate rigging undermines trust in banking

By Pedro Nicolaci da Costa

Widespread manipulation of key benchmark interest rates such as the London Interbank Offered Rate, or Libor, threatens public confidence in the financial system, and must be prevented through fines and criminal prosecution, Federal Reserve Gov. Jerome Powell said Tuesday.

Powell has become the Fed’s point-man in global efforts to find a more credible alternative to Libor and other comparable rates around the world, which were alleged to be rigged on a consistent basis to favor the banks setting those rates.

His remarks at the Brookings Institution in Washington referred primarily to a U.K. policy review that is in charge of addressing the problem of rate-fixing. Powell said the review “looks to identify further steps that should be taken to restore public confidence in fixed-income, currency and commodities markets in the wake of the depressingly numerous instances of serious misconduct in these markets in recent years.”

“That misconduct has been, and will continue to be, addressed through substantial fines and criminal prosecution of the firms and individuals involved,” Powell added.

Powell stressed that activities in these financial markets have widespread effects on the broader economy.

Dealers at major Wall Street firms are alleged to have manipulated interest rates to benefit their trading positions, and banks were accused of reporting artificially low rates in the financial crisis to conceal their problems. Seven banks and brokerages have settled with regulators over alleged manipulation, and some of their employees have been criminally charged.

In November, Citigroup Inc. and J.P. Morgan Chase & Co. agreed to pay more than $1 billion each to resolve allegations that they tried for years to manipulate the foreign-currency market, the biggest fines wrung from a group of six banks by regulators in the U.S., U.K. and Switzerland.

Ukraine, Latvia, Benchmarks: What to Watch in the EU Jan. 5-9

By Viktoria Dendrinou

Happy New Year to all Brussels-watchers out there! The European Union’s year starts fairly calmly, at least as far as the official schedules are concerned, now Latvia has taken over the bloc’s rotating presidency from Italy. Meanwhile, in Brussels, the European Parliament will reconvene on Jan. 5. Here are three things to watch in the week ahead:

Latvia took over the European Union’s six-month rotating presidency at the start of this year. EU Commissioners will head to Riga on Wednesday – alongside many members of the Brussels press pack – to listen to the presidency’s plans for the next six months.

The International Monetary Fund will go back to Ukraine on Thursday to continue discussions on reforms and financing. The EU hasn’t yet made a formal proposal on a new loan for Ukraine, although the bloc’s finance ministers discussed a fresh balance of payments loan for Ukraine in December. Officials from the Group of Seven nations have also held several rounds of discussions on fresh financial aid. The EU has already agreed to €1.6 billion ($1.92 billion) in balance-of -payments loans to Kiev to help stabilize the economy. The IMF has estimated Ukraine may need up to about $15 billion in extra financing through the first quarter of 2016, as the conflict in eastern Ukraine weighs on growth and government finances.

Also on Thursday, the European Parliament’s economics committee will debate rules to improve the transparency and reliability of benchmarks that may affect key financial-market rates. The committee will look at the latest draft legislation to regulate benchmarks at EU-level, which was proposed by the European Commission last year, prompted by the rigging of interest-rate indexes like Libor and Euribor.

Corrections & Amplifications: The European Parliament’s economics committee will debate the draft legislation on benchmarks on Thursday. An earlier version of this article incorrectly said the committee would debate the proposed rules on Monday.

Swiss Central Bank to Introduce Negative Interest Rates

By Neil Maclucas, Brian Blackstone, Andrew Morse

ZURICH—Switzerland took surprise action Thursday to cool its currency’s strength and bolster the country’s exports.

The Swiss central bank said it would charge banks for overnight deposits—a move that should help to crimp a recent rise in the Swiss franc. As a traditional haven in times of international tension, the franc has appreciated markedly in recent weeks against the euro, the currency of the Alpine country’s key export market.

The move comes as central banks across Europe scramble to kick-start growth and stave off falling prices.

With its decision, the Swiss Central Bank joined the European Central Bank in enacting a policy aimed at discouraging banks from parking excess funds with a central bank and pushing them to lend. Switzerland’s decision to charge for deposits highlights the divergent paths being taken by policy makers in developed economies as their economies recover at varying speeds.

In the U.S., the Federal Reserve is expected to start raising rates in the middle of 2015, while the Bank of England could follow suit later in the year. By contrast, central banks across much of the European Continent may keep easy-money policies in place for years as their interconnected economies force officials to defend their financial systems with aggressive policy moves.

“Divergent monetary policies were very much a prospect already, but the latest events have been exacerbating this,” said Jonathan Loynes, economist at consultant Capital Economics.

Beginning Jan. 22, the Swiss National Bank will charge banks 0.25% to deposit overnight funds, the bank said. The move will push the three-month Swiss franc Libor rate, currently in a range between 0.0% and 0.25%, into negative territory.

The central bank’s decision to introduce what is known as “negative interest rates” comes after months of pressure on the franc, which has strengthened to near 1.20 a euro, a level the central bank has pledged for the past three years to defend.

A strong franc, which has benefited from haven buying and weakness in eurozone economies, raises the risk of deflation, a damaging spiral of falling prices and slowing spending, and creates headwinds for the country’s exporters, many of whom depend on the European Union as an important market. A stronger currency makes exporters’ goods sold abroad more expensive.

“The introduction of negative interest rates makes it less attractive to hold Swiss franc investments,” the Swiss National Bank said. It added it will continue to defend the 1.20 franc-to-euro level and “is prepared to purchase foreign currency in unlimited quantities and to take further measures, if required.”

The Swiss franc dropped on the news, falling to its lowest level since October.

The decision, made before the stock market opened, also buoyed Swiss shares, with the SMI index closing up 2.7%. Midday Thursday in New York, the franc was at 1.2041, compared with 1.2010 late Wednesday.

In June, the ECB started charging banks to deposit funds, a move designed to encourage banks to lend.

The ECB is expected by analysts to step up its stimulus efforts as soon as its next meeting on Jan. 22, the same day the SNB policy comes into force, by announcing a large-scale asset-purchase program that includes government bonds. On Wednesday, ECB board member Benoît Coeuré, in an interview with The Wall Street Journal, signaled that the central bank is poised to embark on a large asset-purchase program early in 2015.

The Swiss National Bank said the timing of its move to charge for deposits was unrelated to the ECB meeting and instead fulfills its obligation to give banks 30 days’ notice of a rate change.

“The SNB has bowed to the inevitable,” said Kit Juckes, macro strategist at Société Générale. “If 2015 brings more ECB easing and the start of Fed tightening, it is going to be difficult to hold it, and this may not be the last step they take.”

Europe’s challenge is complicated by tightly linked economies that operate under several currencies and monetary policies, with the ECB as the driving force, given its size.

If the ECB takes aggressive stimulus measures, as it did in September, the response is typically a weaker euro against other European currencies.

This damages exports from Switzerland, Sweden and other European economies that don’t use the euro and puts downward pressure on consumer prices. The response of many of these central banks has been to loosen their own monetary policies.

Denmark, which isn’t part of the eurozone, made its most recent deposit-rate cut hours after the ECB lowered its rate again in September. Sweden’s central bank cut its benchmark lending rate to zero in October.

The Swiss National Bank’s move is the first change to the bank’s three-year policy of defending its minimum exchange rate through the purchase of euros, a practice that has seen its foreign-currency reserves swell to more than 460 billion francs ($473 billion).

The central bank has intervened in currency markets in recent days, the bank’s chairman, Thomas Jordan, said Thursday. The bank has insisted in recent months that it wouldn’t exclude the use of charging for deposits to discourage investors from buying the franc, but some analysts expected the central bank to wait for the next move from the ECB.

The central bank said the 0.25% fee would be charged on Swiss franc deposit balances that exceed a certain threshold, which will vary with account holders, but will be at least 10 million francs.

BGC Partners to Buy RP Martin’s Assets

By Tim Cave

BGC Partners, the U.S.-based interdealer broker, has agreed to acquire the main assets of U.K. rival RP Martin, one of the interdealer brokers fined in the Libor-rigging scandal.

The New York-based group has acquired RP Martin’s London-based assets and expects to buy “further businesses and assets of RP Martin in Sweden and the Netherlands” next year, it said in a statement on Monday.

The deal is subject to regulatory approvals and certain closing conditions and financial terms weren’t disclosed.

The acquired assets generated revenues of more than $50 million in the year to September 30, BGC said.

The acquisition reflects the growing pressures faced by interdealer brokers from derivatives regulation, low market activity and rising infrastructure costs. The industry, in which brokers deal in complex derivatives between banks, has been dominated by five big players, including BGC, Icap, Tradition, GFI Group and Tullett Prebon, but talk of consolidation has grown.

Speaking to analysts last month, Icap’s chief executive Michael Spencer said that there was “overcapacity in the global voice broking market and consolidation would be welcome”.

Mr. Spencer added at the time: “There are five players and really only room for three. It is unlikely that we will be part of this current consolidation but, of course, you can never say never.”

BGC is also in talks to acquire GFI Group for $675 million, rivaling an attempt by futures market operator CME Group to acquire GFI’s electronic and risk management assets.

RP Martin is one of the industry’s smaller brokers and specializes in European rates and currencies products. It has approximately 170 brokers in the U.K., Sweden and the Netherlands, BGC said today.

Shaun Lynn, president of BGC Partners, said in a statement: “We expect it to bolster our European business by taking us into new geographies and complementing and strengthening our existing rates and foreign exchange platforms in the U.K. and Europe.”

RP Martin was fined a total of $2.3 million by U.K. and U.S. regulators in May for its involvement in the attempted rigging of Libor, one of the smallest fines against firms involved in the scandal.

The UK’s Financial Conduct Authority said at the time that RP Martin brokers colluded with a trader at UBS to manipulate the Libor rate tied to the Japanese yen, in return for more than $400,000 in bribes.

Two of its former brokers have been charged by U.K. prosecutors over rate rigging.

These litigation costs have grown four years in a row, the consulting firm says in its report. “Litigation is the new cost of doing business,” the firm’s analysts wrote.

Banks in the U.S. and E.U. paid out $60 billion to settle legal claims during in just the first nine months of this year. That was up from $46 billion in 2013, $44 billion in 2012 and $22 billion in 2011, the report said.

Much of the last year’s legal settlements have come in the form of billion dollar pacts over shoddy mortgage securities sold in the lead-up to the financial crisis. More recently, banks have faced scrutiny for their trading of currencies and interest rates, where allegations of manipulation have led to more big fines.

Even though U.S. banks have settled the bulk of claims arising from pre-crisis mortgages, Boston Consulting Group predicts that potential litigation risks remain “substantial.”

Yet banks that prepare for the heightened costs should continue to generate profits, the consulting firm wrote. And the global banking sector is getting stronger, returning to what the consulting firm called “economic profitability” for the first time since the financial crisis in 2013. (That metric weighs refinancing costs as well as operating and risk costs, Boston Consulting Group says.)

To become profitable, banks need to spend time and money now to set up codes of conduct to “prevent future episodes of misconduct” that will costs banks more down the road in legal bills.

“Global banking has entered a new era in which every region, product, and legal entity will be closely regulated,” the report says.

Two other areas that banks must address is proving their financial stability, or complying with regulations on how much risky capital they can hold and what the ratio of the bank’s capital to its total assets should be. Overall, banks have made strides here, Boston Consulting Group wrote. “This is because investors increasingly require additional cushions above and beyond the regulatory minimums.”

Banks, the report says, have a long way to go in implementing changes and making themselves more transparent to regulators and investors. “Banks need a shift in mind-set. Regulation will not go away. Instead, banks must adopt a good-citizen approach to proactively addressing the broad intent of regulation.”

To get there, the consulting firm suggests that banks establish an inventory of all their potential risks, including those from regulations, business-conduct and potential data breeches, and allocate responsibilities to two lines of individuals within the firm for addressing them. The consulting firm also said that banks should employ an early-warning system that could detect which loans are likely to default.

Banks, the firm writes, will see a host of benefits if they become more transparent. Among them, the potential to pursue M&A transactions, which is something that government regulators have cracked down on so far.

Ms. McDermott said that big fines must continue to be meted out to keep bank boards focused on changing their institution’s culture. She refuted claims that the FCA’s approach to fining was “like a soviet tractor factory” — referring to accusations that the regulator was just churning out fines to appease policitians — saying that London’s reputation as a financial center was at stake.

“Enforcement should not be written off as a trip to the headmaster’s office where you take your punishment and leave,” Ms. McDermott said.

Lessons are being learnt. Slowly. The FCA hopes that banks will change in the same way that attitudes to drink driving have altered over time. Ms. McDermott said her parents’ generation didn’t drink and drive for fear of getting caught. “For my generation it was presented as a moral issue… the impact on the lives of other people.”